A little over a year ago Mark Perry wrote this nonsense:
The chart above (thanks to Olivier Ballou) is an update of a chart we produced last year about this time, and shows the percent changes since January 1997 in the prices of selected consumer goods and services, along with the increase in average hourly earnings in this version … Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.
To which I reminded him of the Baumol cost disease and followed up with this. It is good to see that Alex Tabarrok has been thinking about this issue as has John Cochrane. Read their posts as there is a lot of great discussion but permit me to cite just this:
I assumed that regulation, bloat and bureaucracy, monopoly power and the Baumol effect would each explain some of what is going on. After looking at this in depth, however, my conclusion is that it’s almost all Baumol effect.
Does government regulatory capture include OPEC? How about the American Medical Association? I’d throw all of the specialized trade unions like plumbers and electricians into that mix as well. One might want to include religious ministers in this collection too. And, how can we forget about lawyers?
I note that the items rising the most rapidly have been higher ed and health care. These have not risen so rapidly in other nations. Aside from lots more public support in other nations, what is going on in US higher ed is a complicated matter, with Tabarrok at MR making incorrect arguments I think, saying it is not administrative bloat, whereas I think there is lots of evidence it is. But why that is being allowed remains unclear.
On health care, US costs were not that different from those in other high income nations 30 years ago, but are now about twice theirs on average. And while it is heavily regulated and partly state-run, ours is the only system among high income nations that does not provide universal coverage and also has a higher percent privately run than any of the others.
More is going on here than just Baumol cost disease in the US.
Yes, you are correct. I detailed some of the issues in a few posts on the topic, the latest being “Can You Patent The Sun?” and what the Swiss are seeing with cancer drugs, how the industry is approaching the pricing for all drugs, the issue with EpiPens to which the CEO is basically lying, industry consolidation, and healthcare in general.
It has been slightly more than 1 year since you wrote your comments on Mark Perry and Baumol Cost Disease.
There are a couple of studies out of which I have written about concerning rising prices/costs from whoever’s perspective one wishes to view it. The JAMA study of 2017 looked at the rising cost of healthcare between 1996 and 2013 which resulted in ~$1 trillion adjusted for inflation of which 50% was due solely to pricing increases. A more recent Commonwealth Fund study looked at Hospital and doctor cost/price increases or various procedures.
Baumol’s Cost Disease does adequately describe what is going on in healthcare with identifying mitigating circumstance.
In the former JAMA study, Diabetes care saw the biggest increase of $64.4 billion. $44.4 billion of this increase was solely in pharmaceutical spending. Said another way, two-thirds of the increase in treating diabetes was due simply to the increased pricing from pharmaceutical companies. There was nothing new here. Humalog is a decades old technology and Eli Lilly under HHS Azar as the president took advantage of their position to increase pricing.
A new philosophy has emerged in pharmaceuticals. From an earlier post . . . Novartis CEO Vas Narasimhan: “Cell and gene therapies are bringing about a new era of cancer medicines going beyond ‘just improving lives and are saving them.’” continuing; The new therapies are challenging the traditional model for paying for medical treatment and the industry is divided on this approach. Pricing for these one-time usage therapies are to be based on four key measures of value – the improvements they offer to patients both clinically and in terms of their quality of life, and the resulting benefits to the health-care system and society. As pointed out in the Swiss Info article, based on value to the patient, pharmaceutical companies believe they are justified in getting back $14.50 for every dollar invested in bring a new drug to market.” Their margins are 80 and 85% for cancer drugs.
From another post, the healthcare industry is consolidating as measured by the Herfindahl-Hirschman Index (HHI) measuring competition in and around cities. The results of the HHI revealed an increase in the concentration of hospitals from mergers and acquisitions, going from moderately concentrated in 1990 with an HHI numeric of 1570, to more concentrated in 2009 with a HHI of 2500, and with some cities purely monopolistic at 10,000.
Does Baumols Cost Disease come into play in describing the rising cost of healthcare? Yes, I beleieve it does overall; but, there are other influences of which I have detailed some coming into play here.
My quick Wiki look at “Baumol effect ” tells me that barbers should get paid more in France than in Poland because the French have more money to pay.
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As long as we are on the topic of labor market seeming conundrums: I read the other day that higher minimum wages in San Francisco are pushing some multi-star restaurants over the edge — killing jobs in another words.
Of course the wage raises are costing jobs — at higher priced goods firms. A general increase in low income wages is not going to add any demand at high star restaurants. But it will increase demand a fast food and bargain retail shops — where their higher wages may be eaten up partially by higher consumer prices caused by wage raises to those firms lower wage employers. It is supposed to take business away from high star places and resend it (more proportionately) towards lower price places.
The multi-star restaurants in SFare not affected by the min wage. Nobody working at those places gets paid so poorly. It is the lower tier, although not the chains, poorer quality places that are in trouble.
If Baumol was the answer, would not the cost of education and health care closely match the rise in wages, which is on Perry’s chart?
Cochrane notes that demand for each has increased. Both industries face increasing marginal costs. Instead of economies of scale, doctors face older patients and teachers face less motivated students.
More allergies, more cancer, more ADD, more autism, more litigious parents, etc. are also confounded in the data along with the Baumol effect. The underlying assumption that the service provided 20 years ago is the same as the service provided today is absurd.
FWIW, since 1950, college research share, admin share have not increased, plant share actually down.
Teachers per student, other staff per student doubled. Principals and administrators per student stayed the same.
Of course, pay for employees should have increased as fast a per capita income. Should. ???
FWIW Just saw it yesterday.
I assume government capture includes things like real estate.
I remember your posting regarding the Baumol’s effect. I had not heard of it, so looking it up. I of course stumble on the common example of the string quartet to explain it. I remember thinking that something was wrong with this thinking.
To suggest that productivity gain in music should mean that it should take fewer people to play a given piece just seems wrong. Frankly, if you are going to do the job as it is to be done then you just can not expect productivity gain via fewer musicians being needed. One violin can only be played by 1 musician which can only play 1 violin.
So, maybe not the best economic activity to use to educate someone about Baumol.
However, as I kept thinking; back when Beethoven wrote, 1 musician could only reach a very small customer base. The customer had to be there at the time of the musician playing. Now, one musician can reach millions and theoretically billions of people via recording and live broadcasting.
So, is the proper measurement of productivity gain the output of an individual in this musical example, one person, one instrument or is the proper measurement the number of people experiencing the musician playing?
In the art world, music or otherwise it’s always one artist doing 1 thing. But, that 1 artist can reach many more people today for a lot less cost than bringing 1 million people to a central place to hear the string quartet at the time of Beethoven.
So, maybe we need to look at what is considered productivity gain when it come to work that is not of the making widget kind like teaching and doctoring.
Oh, one last thing, there is a lot of waste in healthcare. I’ll just leave there.